<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 For the quarterly period ended March 31, 1999 or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 For the transition period from ___________ to
___________.
Commission file number 0-27168
METACREATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-4102687
(State of incorporation) (I.R.S. Employer Identification Number)
6303 Carpinteria Ave, Carpinteria, CA 93013
(Address of principal executive offices)
(805) 566-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of May 12, 1999, there were outstanding 24,434,666 shares of the registrant's
Common Stock, $0.001 par value per share, which is the only outstanding class of
common or voting stock of the registrant.
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METACREATIONS CORPORATION
FORM 10-Q
Table of Contents
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements....................................... 3
Consolidated Balance Sheets - March 31, 1999 and
December 31, 1998
Consolidated Statements of Operations - Three months
ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows - Three months
ended March 31, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................... 24
SIGNATURES ........................................................... 25
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
METACREATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ---------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,858 $ 16,297
Short-term investments 39,925 30,038
Accounts receivable, net 14,357 12,375
Inventories 527 526
Income taxes receivable 254 220
Deferred income taxes 5,913 5,913
Prepaid expenses 3,354 3,767
--------- ---------
Total current assets 68,188 69,136
Property and equipment, net 6,311 6,829
Other assets 1,699 2,000
--------- ---------
Total assets $ 76,198 $ 77,965
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,746 $ 3,777
Accrued expenses 3,485 4,200
Royalties payable 534 958
--------- ---------
Total current liabilities 7,765 8,935
Stockholders' equity:
Preferred stock, $.001 par value, 5,000 shares
authorized - no shares issued and outstanding at
March 31, 1999 and December 31, 1998, respectively -- --
Common stock, $.001 par value; 75,000 shares authorized -
24,419 and 24,243 shares issued and outstanding at
March 31, 1999 and December 31, 1998, respectively 24 24
Paid-in capital 113,308 112,829
Notes receivable from stockholders (4,471) (4,491)
Cumulative translation adjustment (132) (128)
Accumulated deficit (40,296) (39,204)
========= =========
Total stockholders' equity 68,433 69,030
--------- ---------
Total liabilities and stockholders' equity $ 76,198 $ 77,965
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
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METACREATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1999 1998
-------- --------
<S> <C> <C>
Net revenues ............................................. $ 12,068 $ 14,423
Cost of revenues ......................................... 1,647 2,331
-------- --------
Gross profit ............................................. 10,421 12,092
Operating expenses:
Sales and marketing .................................... 6,449 7,915
Research and development ............................... 3,888 4,219
General and administrative ............................. 1,733 1,848
-------- --------
Total operating expenses ................................. 12,070 13,982
-------- --------
Loss from operations ..................................... (1,649) (1,890)
Interest and investment income, net ...................... 557 714
-------- --------
Loss before benefit for income taxes ..................... (1,092) (1,176)
Benefit for income taxes ................................. -- (353)
-------- --------
Net loss ................................................. $ (1,092) $ (823)
======== ========
Net loss per common share - basic and diluted ............ $ (0.04) $ (0.03)
======== ========
Weighted average number of shares outstanding - basic and
diluted ................................................ 24,325 23,620
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
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METACREATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................... $ (1,092) $ (823)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization ................. 988 973
Provision for losses on receivables and product
returns ..................................... 2,847 2,740
Provision for losses on inventory ............. 210 239
Accrued interest income ....................... (44) (42)
Changes in operating assets and liabilities:
Accounts receivable ......................... (4,829) 2,636
Inventories ................................. (211) (17)
Income taxes receivable ..................... (34) (185)
Prepaid expenses and other assets ........... 544 (1,220)
Accounts payable and accrued expenses ....... (452) (1,224)
Royalties payable ........................... (424) (185)
-------- --------
Net cash (used in) provided by operating
activities ............................... (2,497) 2,892
Cash flows from investing activities:
Purchases of short-term investments ............... (17,708) (14,427)
Proceeds from sales and maturities of short-term
investments ..................................... 7,821 18,769
Purchases of property and equipment ............... (216) (1,245)
Purchases of software technology and product rights (84) (175)
-------- --------
Net cash (used in) provided by investing
activities ............................... (10,187) 2,922
Cash flows from financing activities:
Decrease in notes receivable from officers ........ 64 --
Proceeds from exercise of stock options ........... 185 9
-------- --------
Net cash provided by financing activities ... 249 9
Effect of exchange rates changes on cash ............ (4) 1
-------- --------
Net (decrease) increase in cash and cash equivalents (12,439) 5,824
Cash and cash equivalents at beginning of period .... 16,297 9,653
-------- --------
Cash and cash equivalents at end of period .......... $ 3,858 $ 15,477
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE> 6
METACREATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of MetaCreations Corporation and its wholly-owned subsidiaries
(collectively "MetaCreations" or the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statement presentation. In the opinion of management, the accompanying
consolidated balance sheets and related interim consolidated statements of
operations and cash flows include all adjustments (consisting only of normal
recurring items) considered necessary for their fair presentation. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses.
Actual results could differ from those estimates. The consolidated results of
operations for the period ended March 31, 1999 are not necessarily indicative of
results to be expected for the year ending December 31, 1999. The information
included in this Form 10-Q should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto as of December 31,
1998 and 1997, and for the three years in the period ended December 31, 1998, as
filed on Form 10-K.
2. RESTRUCTURING
On June 30, 1998, the Company announced a restructuring plan aimed at reducing
costs and improving competitiveness and efficiency, which was implemented during
the third quarter of 1998. In connection with the restructuring, management
considered the Company's future operating costs and levels of revenue in 1998
and beyond, and determined that a restructuring charge of approximately
$4,955,000 was required to cover the costs of reducing certain sectors of its
workforce and facilities. The restructuring charge included an accrual of
approximately $2,208,000 related to severance and benefits associated with the
reduction of approximately 75 positions during July 1998, as well as the related
reduction of certain of the Company's facilities. Non-cash restructuring costs,
which totaled approximately $2,747,000, primarily related to the write-down of
non-strategic business assets made redundant or obsolete due to the streamlining
of the Company's product lines and/or reduction of facilities. The Company
completed the restructuring plan during the first quarter of 1999.
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The following table depicts the restructuring activity through March 31, 1999
(in thousands):
<TABLE>
<CAPTION>
TOTAL BALANCE AT
RESTRUCTURING SPENDING / MARCH 31,
CHARGES CHARGES 1999
------ ------ ---------
<S> <C> <C> <C>
Write-down of operating assets $2,747 $2,747 $ --
Severance and benefits ....... 1,801 1,801 --
Vacated facilities ........... 116 116 --
Other ........................ 291 291 --
------ ------ -----------
$4,955 $4,955 $ --
====== ====== ===========
</TABLE>
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Finished goods ....... $370 $434
Materials and supplies 157 92
---- ----
$527 $526
==== ====
</TABLE>
4. INCOME TAXES
The Company did not record a benefit for income taxes for the three months ended
March 31, 1999 based on management's assessment of the recoverability of the
deferred tax assets. Management's assessment included an evaluation of the
Company's deferred income tax assets; available tax carrybacks; cumulative net
income, excluding costs related to mergers and acquisitions; available tax
planning strategies; and future financial statement projections. Based on this
assessment and interpretation of the provisions of SFAS No. 109, management has
concluded that additional net operating losses and other tax benefits generated
during 1999 require a valuation allowance. Management's assessment with respect
to the amount of deferred tax assets considered realizable may be revised over
the near term based on actual operating results and revised financial statement
projections.
The benefit for income taxes for the three months ended March 31, 1998 is based
on the Company's estimated annualized effective tax rate for the year, after
giving effect to the utilization of available tax credits and tax planning
opportunities.
7
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METACREATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
5. LOSS PER SHARE
The following table provides a reconciliation of the numerators and denominators
of the basic and diluted per-share computations for the three months ended March
31, 1999 and 1998, in accordance with SFAS No. 128, "Earnings per Share" (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Three Months Ended March 31, 1999:
Basic EPS ...................... $(1,092) 24,325 $(.04)
Effect of dilutive securities .. -- --
------- ------
Diluted EPS .................... $(1,092) 24,325 $(.04)
------- ------
Three Months Ended March 31, 1998:
Basic EPS ...................... $ (823) 23,620 $(.03)
Effect of dilutive securities .. -- --
------- ------
Diluted EPS .................... $ (823) 23,620 $(.03)
======= ======
</TABLE>
The computation of the diluted number of shares excludes unexercised stock
options which are anti-dilutive. Stock options to purchase 7,094,000 and
6,749,000 shares of common stock were outstanding as of March 31, 1999 and 1998,
respectively, and excluded from the computation.
8
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto.
The discussion and analysis below contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual results could differ materially from those expressed
or forecasted in any such forward-looking statements as a result of certain
factors, including those set forth in "Factors That May Affect Future Operating
Results," as well as those discussed elsewhere in the Company's SEC reports,
including without limitation, the Company's audited consolidated financial
statements and notes thereto as of December 31, 1998 and 1997, and for the three
years in the period ended December 31, 1998, as filed on Form 10-K.
OVERVIEW
MetaCreations was formed in May 1997, as a result of the merger of MetaTools,
Inc. and Fractal Design Corporation, and included the acquisitions of Real Time
Geometry Corp. in December 1996 and Specular International. Ltd. in April 1997,
as well as the previous merger of Fractal and Ray Dream, Inc. in May 1996.
Net revenues totaled $12.1 million for the three months ended March 31, 1999,
representing a 16% decrease compared to the three months ended March 31, 1998,
as a result of lower than expected demand in the retail channels and lower OEM
revenues compared to the three months ended March 31, 1998. However, compared to
the three months ended December 31, 1998, net revenues increased $716,000, or
6%. This sequential growth in revenues was substantially achieved through the
Company's introduction of two new products, Headline Studio and Office
Advantage, as well as a new version of an existing product, Bryce 4.
The Company's future revenues continue to be substantially dependent upon the
continued market acceptance of the Company's existing leading products and
technologies: Bryce, Infini-D, Kai's Photo Soap, Kai's Super GOO, Kai's Power
Tools, MetaFlash, MetaStream, Painter, Poser, and Ray Dream Studio, in addition
to the Company's two new products, Headline Studio and Office Advantage. In this
regard, revenue from the sale of these products and licensing of the
technologies represented a substantial majority of net revenues during the three
months ended March 31, 1999. The Company also has a number of new product
development efforts under way, and a significant portion of future revenues is
dependent upon the timely introduction and ultimate success of these activities.
9
<PAGE> 10
In 1998, MetaCreations introduced its Creative Web strategy designed to leverage
the Company's 2D and 3D technologies for use on the Internet through both new
and existing products. The Company's future revenues will also be dependent upon
the Company's ability to successfully develop and market new products based on
this strategy.
The Company develops substantially all of its products either internally,
through acquisitions, or occasionally through co-development arrangements with
third parties. There can be no assurance that the Company will be able to
continue to supplement its product development efforts in the future through
acquisitions or co-development relationships.
The Company sells its products primarily to domestic and international
distributors, including mail order resellers and retail outlets. The Company
also sells its products to OEMs for bundling with their hardware or software
products and directly to end users, generally through telesales, direct mail
campaigns, and the Internet from the Company's online store. Fluctuations in
distributor purchases can cause significant volatility in the Company's
revenues. Distributors generally stock the Company's products at levels which
may fluctuate significantly for a variety of reasons, including the
distributors' ability to finance the purchase of products and to devote shelf
space, catalog space or attention to the products. Distributor purchases may
also be affected by the Company's introduction of a new product or new version
of a product, the Company's end user promotions programs, anticipated product
price increases, the Company's purchases of display space at retail outlets and
other factors. Further, OEM and licensing agreements, which generally provide
for minimum guaranteed non-refundable payments to the Company, typically
coincide with the planned introduction of OEM bundled products and are often
entered into at the end of the quarter. The timing of the execution of such
agreements can fluctuate substantially throughout the year, causing volatility
in the Company's revenues, operating results, and cash flows.
Since its inception, the Company has focused on building its product portfolio
and establishing brandname awareness of its products. Historically, these
activities have resulted in significant increases in all expense categories. The
Company's recent product development efforts to focus on the Creative Web
strategy has resulted in increased research and development expenditures
subsequent to the Company's restructuring in the third quarter of 1998. Such
higher expense levels combined with costs associated with periodic mergers and
acquisitions, including the related write-off of acquired in-process technology,
and quarterly fluctuations in net revenues have contributed to the Company's
recent annual and quarterly losses, as well as fluctuations in its operating
results. The Company intends to continue to invest significant amounts both in
expanding its product portfolio and in maintaining and enhancing brand awareness
of its products, and accordingly may continue to experience losses and
volatility of net revenues and operating results in future periods.
10
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OPERATING RESULTS
The following table sets forth certain selected financial information expressed
as a percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
----- ----
<S> <C> <C>
Net revenues ...................... 100.0 % 100.0 %
Cost of revenues .................. 13.6 16.2
----- ----
Gross margin .................... 86.4 83.8
Operating expenses:
Sales and marketing ............. 53.4 54.9
Research and development ........ 32.2 29.2
General and administrative ...... 14.4 12.8
----- ----
Total operating expenses .......... 100.0 96.9
----- ----
Loss from operations .............. (13.6) (13.1)
Interest and investment income, net 4.6 5.0
----- ----
Net loss before benefit for income (9.0) (8.1)
taxes
Benefit for income taxes .......... -- (2.4)
----- ----
Net loss .......................... (9.0)% (5.7)%
====== ====
</TABLE>
Net Revenues
Net revenues totaled $12.1 million for the three months ended March 31, 1999, a
decrease of 16% over net revenues of $14.4 million for the three months ended
March 31, 1998. Net revenues decreased as a result of lower demand in the retail
channels and lower OEM revenues compared to the three months ended March 31,
1998. International sales accounted for $3.2 million, or 26% of net revenues,
for the three months ended March 31, 1999, compared to $4.7 million, or 33% of
net revenues, for the three months ended March 31, 1998. The decrease in
international sales was attributed to reduced revenues from Japan resulting from
the economic weakness in Japan, and the Asia Pacific region in general.
The Company recognizes revenue from the sale of its products in accordance with
Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended
by SOP 98-4, "Deferral of the Effective Date of Certain Provisions of SOP 97-2."
SOP 97-2 and SOP 98-4 generally require revenue earned on software arrangements
involving multiple elements (e.g., software products, upgrades/enhancements,
postcontract customer support, etc.) to be allocated to each element based on
the relative fair value of the elements. The fair value of an element must be
based on evidence which is specific to the Company. The Company recognizes
product revenues upon shipment to the customer, satisfaction of Company
obligations, if any, and reasonable assurance regarding the collectability of
the corresponding receivable. Revenue allocated to postcontract customer support
is recognized ratably over the term of the support. If the Company does not have
evidence of the fair value for all elements in a multiple-element arrangement,
all revenue
11
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from the arrangement is deferred until such evidence exists or until all
elements are delivered.
The Company provides an allowance for estimated returns at the time of product
shipments and adjusts this allowance as needed based on actual return history.
Such reserves as a percentage of gross revenues have varied over recent years,
reflecting the Company's experience in product returns as it has significantly
expanded the proportion of its sales through third-party distribution channels
and increased its product portfolio. The Company expects reserves will continue
to vary in the future. The Company's agreements with its distributors generally
provide the distributors with limited rights to return unsold inventories under
a stock balancing program. The Company monitors the activities of its
distributors in an effort to minimize excessive returns and establishes its
reserves based on its estimates of expected returns. The establishment of
reserves requires judgments regarding such factors as future competitive
conditions and product life cycles, which can be difficult to predict. As a
result, there can be no assurance that established reserves will be adequate to
cover actual future returns.
The Company has entered into agreements whereby it licenses products to original
equipment manufacturers ("OEM's") and foreign publishers which provide such
customers the right to produce and distribute multiple copies of its software.
Nonrefundable fixed fees are recognized as revenue at delivery of the product
master to the customer, satisfaction of Company obligations, if any, and
reasonable assurance regarding the collectability of the corresponding
receivable. Per copy royalties in excess of fixed amounts are recognized as
revenue when such amounts exceed fixed minimum royalties. Revenues under OEM
contracts without nonrefundable fixed fees are recognized as earned over the
term of the contract.
Cost of Revenues
Cost of revenues includes the costs of goods sold, royalties due to external
developers, inventory management costs, freight and handling costs and reserves
for inventory obsolescence. Cost of revenues totaled $1.6 million, or 14% of net
revenues, for the three months ended March 31, 1999, compared to $2.3 million,
or 16% of net revenues, for the three months ended March 31, 1998. The decrease
in cost of revenues resulted from the changing mix of product sales towards
products with lower royalties, as well as efficiencies achieved in the cost of
goods and management costs. Royalties represented 1% of net revenues for the
three months ended March 31, 1999, down from 3% of net revenues for the three
months ended March 31, 1998.
The Company expects that cost of revenues will increase in the future
commensurate with any increase in net revenues, but may vary as a percentage of
net revenues.
12
<PAGE> 13
Sales and Marketing
Sales and marketing expenses include advertising, promotional materials, mail
campaigns, trade shows and the compensation costs of sales, marketing, customer
service and public relations personnel who promote the Company's products,
including related facilities costs. Sales and marketing expenses totaled $6.4
million, or 53% of net revenues, for the three months ended March 31, 1999,
compared to $7.9 million, or 55% of net revenues, for the three months ended
March 31, 1998. The decrease in sales and marketing expenses primarily resulted
from the restructuring programs implemented during the third quarter of 1998,
which included reductions in sales and marketing personnel and promotional
activities.
The Company anticipates that sales and marketing expenses will increase in
future periods as the Company's product offerings expand, although they may vary
as a percentage of net revenues.
Research and Development
Research and development expenses consist primarily of personnel costs,
consultant fees and required equipment and facilities costs related to the
Company's product development efforts. Research and development expenses totaled
$3.9 million for the three months ended March 31, 1999, compared to $4.2 million
for the three months ended March 31, 1998. The decrease in research and
development expenses was attributed to decreased headcount at March 31, 1999
compared to March 31, 1998. As a percentage of net revenues, research and
development expenses increased from 29% for the three months ended March 31,
1998 to 32% for the three months ended March 31, 1999.
The Company expects research and development expenses will increase in future
periods, but may vary as a percentage of net revenues.
General and Administrative
General and administrative expenses include compensation costs related to
executive management, finance and administration personnel of the Company along
with other administrative costs including legal and accounting fees, insurance
and bad debt expenses. General and administrative expenses totaled $1.7 million
for the three months ended March 31, 1999, compared to $1.8 million for the
three months ended March 31, 1998. The decrease in general and administrative
expenses primarily resulted from the restructuring programs implemented during
the third quarter of 1998, which included reductions in general and
administrative personnel. As a percentage of net revenues, general and
administrative expenses increased from 13% for the three months ended March 31,
1998 to 14% for the three months ended March 31, 1999.
The Company expects that its general and administrative expenses will increase
in the future as the Company expands its staffing to support expanded
operations, but may vary as a percentage of net revenues.
13
<PAGE> 14
Benefit for Income Taxes
The Company did not record a benefit for income taxes for the three months ended
March 31, 1999 based on management's assessment of the recoverability of the
deferred tax assets. Management's assessment included an evaluation of the
Company's deferred income tax assets; available tax carrybacks; cumulative net
income, excluding costs related to mergers and acquisitions; available tax
planning strategies; and future financial statement projections. Based on this
assessment and interpretation of the provisions of SFAS No. 109, management has
concluded that additional net operating losses and other tax benefits generated
during 1999 require a valuation allowance. Management's assessment with respect
to the amount of deferred tax assets considered realizable may be revised over
the near term based on actual operating results and revised financial statement
projections.
The benefit for income taxes for the three months ended March 31, 1998 is based
on the Company's estimated annualized effective tax rate for the year, after
giving effect to the utilization of available tax credits and tax planning
opportunities.
Net Loss
Net loss was $1.1 million, or $0.04 per share, for the three months ended March
31, 1999, compared to a net loss of $823,000, or $0.03 per share, for the three
months ended March 31, 1998.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict. Therefore, actual results could differ materially from
those expressed or forecasted in any such forward-looking statements as a result
of certain factors, including those listed below.
Shares of MetaCreations' Common Stock are speculative in nature and involve a
high degree of risk. The following risk factors should be considered carefully.
The risks described below are not the only ones facing MetaCreations. Many
factors could cause our results to be different, including the following risk
factors and other risks described in this document, as well as those discussed
elsewhere in the Company's SEC reports, including without limitation, the
Company's audited consolidated financial statements and notes thereto as of
December 31, 1998 and 1997, and for the three years in the period ended December
31, 1998, as filed on Form 10-K. If any of the following risks occur, our
business would likely be adversely affected and the trading price of our Common
Stock could decline. This could result in a loss of all or part of your
investment.
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<PAGE> 15
Fluctuations in Quarterly Results
Our quarterly operating results depend on a number of factors that are difficult
to forecast. If our future quarterly operating results fall below the
expectations of securities analysts or investors, the trading price of our
common stock will likely drop. Our quarterly operating results have fluctuated
significantly in the past and may continue to fluctuate in the future as a
result of many factors, including:
- Introduction or enhancement of new products or technologies by
us or our competitors;
- Market acceptance of our products;
- Industry press reviews of our products;
- Changes in our prices or our competitors' prices;
- The mix of distribution channels for our products;
- The mix of products we sell;
- Distributors' returns of our products; and
- General economic conditions.
In addition, we ship our products as we receive orders. As a result, we have
little or no backlog. A large portion of our revenues occurs in the third month
of each quarter. In addition, demand for our products tends to increase at the
end of the calendar year due to year-end holiday buying trends. Revenues may
also be affected by the volume and timing of the orders we receive, our ability
to fulfill these orders, and our ability to close distribution and licensing
agreements during a particular quarter. Any delays in the receipt and shipment
of orders, the failure of our suppliers and manufacturers to produce and ship
products that we have requested or our inability to close distribution and
licensing agreements would adversely affect our revenues.
Our staffing and other operating expenses are based in large part on anticipated
revenues. It would be difficult for us to adjust our spending to compensate for
any unexpected shortfall. If we are unable to reduce our spending following any
such shortfall, our results of operations would be adversely affected.
The Company has had operating losses the last five quarters. We have recently
restructured and have focused on reducing our operating expenses to levels more
consistent with expected revenues. We cannot guarantee that such reductions in
operating expenses will be enough to restore our profitability.
Possible Volatility of Stock Price
The market price of our common stock has fluctuated significantly in the past.
The price at which our common stock will trade in the future will depend on a
number of factors including:
- Our historical and anticipated operating results;
- General market and economic conditions;
- Our announcement of new products or technologies;
- Actual or anticipated fluctuations in our operating results; and
- Developments regarding our products, or our competitors'
products.
15
<PAGE> 16
In addition, the stock market has experienced extreme price and volume
fluctuations in recent months. This volatility has had a substantial effect on
our stock price, as well as the stock prices of other software companies,
particularly those focused on internet software solutions. These broad market
and industry fluctuations may continue to adversely affect the market price of
our common stock. As a result, the market price of our common stock may continue
to fluctuate.
Risks Associated With Product Transitions and Product Returns
We may announce new products, product versions or technologies that may replace
or shorten the life cycles of our existing products. Our competitors may also
make similar announcements about their products which may replace or shorten the
life cycles of our products.
Although we provide allowances for anticipated returns, actual product returns
may exceed these allowances. Periodically, we may increase our reserves for
returns because of decreased demand and/or lower than expected revenues in our
domestic or international retail channels. This would adversely affect our
business.
In certain cases we sell our new products and product versions at a discounted
price to achieve market acceptance. These price discounts could adversely affect
our revenues. In addition, when we announce plans for new products or new
releases, or when our competitors make similar announcements, customers may
delay purchasing our current products. This would also adversely affect our
business.
Dependence on Distributors And On Other Third Parties
Although we make some direct sales to customers, we generate most of our
revenues from sales through third party distributors. We use many different
distribution channels to sell our products worldwide. Examples of distribution
channels include international distributors, educational distributors,
resellers, hardware superstores, retail dealers, direct marketers, and hardware
and software OEM's. Our future financial results depend in large part on our
relationship with third party distributors and their continued financial
stability. Any termination or significant disruption of our relationship with
any major distributor or retailer, or any significant reduction in sales volume
attributable to a major distributor or retailer, would adversely affect our
business.
The distribution channels are subject to rapid change, significant margin
pressures, consolidation and other financial difficulties. For example, if one
of our distributors experienced financial difficulties such as a bankruptcy, we
might not be able to collect on accounts receivable from that distributor. It is
also possible that new channels of distribution will develop which compete with
existing channels. For example, the Internet is currently evolving as a new
distribution channel for computer software. If we are unable to adapt our
products for distribution through the Internet, to the extent they need
adapting, our business could be adversely affected.
We depend in part on our third party distributors to promote our products to
retailers. These retailers typically have a limited amount of shelf space
subject to high demand. We cannot be sure that our distributors and retailers
will continue to purchase our products or provide our products with adequate
shelf space and promotional support. Their failure to continue to do so would
adversely affect our business.
16
<PAGE> 17
An important part of our strategy is to enhance and diversify our domestic and
international distribution channels. We are currently restructuring our domestic
and international sales and marketing force. We are also continuing to develop
relationships with new third-party distributors and resellers. Our ability to
increase our sales and market share will depend in large part on our success in
recruiting and training sales personnel, distributors and resellers.
Need to Expand International Operations
We sell a large percentage of our products outside of the United States.
International sales accounted for approximately 26% and 33% of net revenues for
the three months ended March 31, 1999 and 1998, respectively. The decrease in
international sales resulted primarily from the economic weakness in Japan, and
the Asia Pacific in general.
An important element of our business strategy is to continue to expand our sales
in international markets, primarily Japan, Western Europe and Asia Pacific. Our
ability to expand our international presence depends on our success in retaining
effective international distributors and our ability to hire and retain
qualified employees abroad.
There are risks inherent in expanding and doing business internationally such
as:
- Difficulties in staffing and managing foreign operations;
- Problems and delays in collecting accounts receivable;
- Fluctuations in currency exchange rates;
- Unexpected changes in regulatory requirements;
- Tariffs and other trade barriers;
- Political instability; and
- Potentially adverse tax consequences.
Currently we sell our products in U.S. dollars. Any increase in the value of the
U.S. dollar as compared to currencies in our principal overseas markets would
increase the cost of our products in these markets. This may adversely affect
our sales in those markets. To date, we have not engaged in currency hedging
transactions to reduce the effect of fluctuations in currency exchange rates.
In addition, effective copyright and trade secret protection may be limited or
unavailable under the laws of certain foreign jurisdictions. The occurrence of
any of these risks would adversely affect the success of our international
operations and our business.
A significant portion of our net revenues stem from the Asia Pacific region,
primarily Japan. Japan has recently experienced weaknesses in their currency,
banking and equity markets. We cannot guarantee that the financial condition in
Japan and in the Asia Pacific region will improve in the near future. If the
current financial crisis in the Asia Pacific region continues or worsens, our
business will be adversely affected. For example, during 1998 and the first
quarter of 1999, our net revenues from Japan and the Asia Pacific region
decreased as a result of depressed demand for our products due to the current
Asian financial crisis.
17
<PAGE> 18
Highly Competitive Graphics Software Markets
We face intense competition in the market for graphics software products. Our
competitors include Adobe Systems, Incorporated; Autodesk, Inc.; Corel
Corporation; Macromedia, Inc.; and Microsoft Corporation. The market for our
products can change rapidly, and customers constantly demand new product
features, accelerated releases of new products, product enhancements and lower
price points.
Many of our competitors or potential competitors are larger than we are and have
significantly greater financial, managerial, technical and marketing resources
than we have. Our business would be adversely affected if any of our competitors
cut prices, increased promotions of their products, announced or accelerated
introduction of new products or enhanced product features or acquired additional
applications or technologies from third parties.
Our present or future competitors may be able to develop products comparable or
superior to ours or may be able to develop new products faster than we can. We
also face competition from developers of personal computer operating systems,
such as Microsoft and Apple Computer. These companies may incorporate functions
into their operating systems which could be superior to or incompatible with our
products. Such competition would also adversely affect our business.
We are currently developing additional product enhancements that we believe will
address customer requirements. However, we cannot be sure that we will complete
our development and introduction of these products on a timely basis. In
addition, we cannot be sure that these product enhancements will achieve market
acceptance. If we are unable to compete effectively in our markets, or if
competition becomes increasingly intense, our business would be adversely
affected.
Dependence on Key Personnel
We depend on the continued employment of our senior executive officers and other
key management personnel. If any of our senior officers or other key employees
leave our company and are not adequately replaced, our business would be
adversely affected.
During February 1998, our previous Chief Executive Officer, John Wilczak,
resigned. Gary Lauer, who had most recently served as President of Silicon
Graphics, Inc.'s ("SGI") World Trade Group and Executive Vice President of SGI's
Worldwide Field Operations, succeeded Mr. Wilczak as our Chief Executive
Officer. In addition, in connection with our recent restructuring, our Senior
Vice President, Sales and Marketing; Vice President, Marketing; Vice President,
Product Management and Design; and Vice President, Corporate Communications left
our Company. In the later half of 1998, we hired a Senior Vice President,
Marketing; a Senior Vice President, Product Development; and a Vice President,
European Sales and Marketing. In April 1999, we hired a Senior Vice President,
Worldwide Sales, and our Chief Design Officer left the Company. If we do not
succeed in attracting and retaining new officers, our business would be
adversely affected.
18
<PAGE> 19
Difficulty of Identifying and Hiring Certain Personnel
Our future success depends on our continuing ability to identify, hire, train
and retain other highly qualified technical and managerial employees. The
competition for such employees is intense, and we have experienced difficulty in
identifying and hiring qualified engineering personnel. If we do not succeed in
attracting and retaining necessary technical and managerial employees in the
future, our business would be adversely affected.
Rapid Technological Change and Dependence On New Products And Product Versions
The market for graphics software products is characterized by rapidly changing
technology. Product life cycles are short and downward pricing pressures are
strong. As a result, our success depends substantially upon our ability to
continue to enhance our products and to develop new products that meet
customers' increasing expectations and that incorporate the latest technology.
We may not be successful in developing and marketing enhancements to our
existing products or introducing new products on a timely basis. Our new or
enhanced products may not succeed in the marketplace. If our new products or
product versions receive bad reviews in industry publications, this would likely
decrease their potential market acceptance, and our business would be adversely
affected.
We expect our research and development expenditures will increase in the future.
If our increased research and development spending is not accompanied by
increased revenues, our business would be adversely affected. We have
supplemented our research and development efforts by exclusively licensing
products developed by or co-developed with third parties. We may not be able to
continue to obtain such outside product development capabilities on terms
favorable to us or at all. If we cannot maintain existing development
arrangements or fail to attract new product development partners, then we would
have to further increase our research and development spending. This would
adversely affect our business.
Potential Delays in Product Releases
We also depend upon internal efforts for the development of new products and
product enhancements. In the past, we have had delays in the development of new
products and product versions. We may experience similar delays in the future.
Risk of Undetected Errors
We offer complex software products which may contain undetected errors. In the
past, we discovered software errors in certain new products and enhancements
after these products were introduced to the marketplace. If errors are found in
our products after we have commercially shipped them, we would likely experience
bad product reviews and a loss or delay of market acceptance. This would
adversely affect our business.
19
<PAGE> 20
Evolving Markets for our Computer Graphic Imaging and Internet/Online Design
Tools
The markets for computer graphic imaging and Internet/online design tools are
still emerging. Digital graphic and Internet/online content developers may not
adopt our products. We also may not have sufficient distribution resources to
market our products successfully or these products may not achieve market
acceptance.
The demand for computer graphic imaging and Internet/online design tools depends
on many factors including:
- Installed base of digital graphic and multimedia capable
personal computers;
- Widespread availability of digital media; and
- Number and expertise of skilled content producers.
If the markets for these tools fail to grow or grow more slowly than we
currently anticipate, then our business would be adversely affected.
Risks of Infringement and Proprietary Rights
We rely on a combination of copyright, trademark, patent, trade secret laws,
employee and third-party nondisclosure agreements and exclusive contracts to
protect our intellectual and proprietary rights, products, and technology, such
as MetaStream and MetaFlash. We distribute our software under shrinkwrap license
agreements. We generally do not obtain signed license agreements from the end
users of our software.
As is typical in the software industry, we do not copy-protect our software. As
a result, unauthorized third parties may be able to copy or reverse engineer our
products. We may not be able to police unauthorized uses of our products, and we
expect that software piracy could be a chronic problem. We also distribute or
plan to distribute our products in other countries which do not protect the
intellectual property of our products to the same extent as laws in the United
States.
We also believe that the growing number of software products available and the
increasing overlap of products may lead to a greater number of infringement
claims. Our products may be the subject of infringement claims in the future.
This could result in costly litigation and could require us to obtain a license
to the intellectual property of third parties. We may be unable to obtain
licenses from these third parties on favorable terms, if at all. Even if a
license is available, we may have to pay substantial royalties to obtain it. If
we cannot obtain necessary licenses on reasonable terms, our business would be
adversely affected.
20
<PAGE> 21
Year 2000 Risks
Background
Many currently installed computer systems and software products are coded to
accept only two digit entries for the year in the date code field. Beginning in
the year 2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, over the
next year, computer systems and software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. The Year 2000 problem
could affect computers, software and other equipment used, operated, or
maintained by us, our business partners, our suppliers and our customers.
Project
We have identified potential Year 2000 risks in five categories:
1) Internal business software and systems;
2) Systems other than information technology systems ("Non-IT systems");
3) Software products we sell to customers;
4) Third party distributors of our products; and
5) Third party suppliers of products and services to us.
Our Year 2000 project includes the following phases for the first three
categories above:
1) Inventorying Year 2000 items;
2) Assessing Year 2000 compliance for items determined to be material;
3) Assigning priorities to identified items;
4) Implementing remediation plans for items determined to be material
and not Year 2000 compliant;
5) Re-testing items for which corrections have been implemented; and
6) Developing contingency plans.
With respect to the our third-party distributors and suppliers, our Year 2000
project consists of the following phases:
1) Contacting distributors and suppliers for information concerning
their Year 2000 readiness;
2) Prioritizing distributors and suppliers as to relative importance;
3) Validating distributor and supplier responses regarding Year 2000
compliance; and
4) Developing contingency plans in the event one or more distributors or
suppliers fails to achieve Year 2000 compliance.
21
<PAGE> 22
Assessment
Internal business software and systems consist primarily of our business
information system which is based in the United States and services our
worldwide operations. During 1997, we completed implementation of a Year 2000
compliant enterprise-wide information system. Additionally, we have completed
the first three phases of the Year 2000 project related to our business systems,
and have substantially completed the fourth phase. We currently expect
completion of the remediation and re-testing phases of our business systems, in
addition to the development of applicable contingency plans, by July 31, 1999.
We presently believe that with the implementation of our new information system
and modification to existing software, Year 2000 compliance will not adversely
affect our business. However, there can be no assurance that our internal
business software and systems will contain all date code changes necessary to
prevent processing errors potentially arising from calculations using the Year
2000 date. If our business systems are not compliant, we could experience
interruptions to our development programs and general business operations.
We have been advised by our suppliers of non-IT systems, which primarily consist
of environmental systems such as fire suppression, air conditioning and heating,
and security systems at various buildings we occupy, that either such systems
are currently Year 2000 compliant.
The computer graphics software products that we sell to customers are not
date-sensitive. As a result, we believe that the current versions of our
products are Year 2000 compliant. However, there can be no assurance that our
current products do not contain undetected errors or defects associated with
Year 2000 that may result in costs which adversely affect our business.
We contract with third parties for the manufacture and distribution of our
products. As a result, we have initiated communications with our key suppliers
and distributors and plan to monitor the status of their Year 2000 readiness. We
have completed the first three phases of our Year 2000 project related to our
key distributors. We have also reviewed the Year 2000 project plan implemented
by our key supplier and have held quarterly meetings with them since the middle
of 1998 in order to monitor their progress. Based on these meetings, we expect
completion of their Year 2000 remediation and testing phases, by June 30, 1999.
If any of our principal suppliers and distributors fail to demonstrate Year 2000
readiness, then we will evaluate alternatives that could include the
identification of alternate suppliers or distributors which have demonstrated
Year 2000 readiness and/or the accumulation of inventory to assure production
capability where feasible or warranted. These activities are intended to provide
a means of managing our risk, but cannot eliminate the potential for disruption
due to third party failure to achieve Year 2000 compliance. We expect the
development of contingency plans, if necessary, to be completed by September 30,
1999. Should any of our key suppliers or distributors not achieve Year 2000
readiness, we may be unable to effectively manufacture our products or
distribute our products to our customers.
22
<PAGE> 23
Costs
The balance of the effort for our Year 2000 project has been by employees whose
costs for this project are not tracked separately. We believe that costs for the
remainder of the project will not be material to our business, financial
position, results of operations, or cash flows.
Risks
Our business, financial position, results of operations, and cash flows could be
materially adversely affected if we or our key suppliers, distributors, or
customers do not achieve Year 2000 compliance. Although our Year 2000 project is
expected to minimize our risks of experiencing a Year 2000 problem, inherent
risks and uncertainties exist despite our efforts. As a result, we are unable to
determine at this time whether the consequences of Year 2000 failures resulting
from these inherent risks and uncertainties will have a material effect on our
business, financial position, results of operations, or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
Historically, net cash used in operating activities and investing activities of
the Company has been significant due to operating losses from acquisitions and
mergers and to working capital requirements. Cash and investments totaled $43.8
million at March 31, 1999, down from $46.3 million at December 31, 1998. Net
cash used in operating activities of the Company totaled $2.5 million for the
three months ended March 31, 1999, compared to net cash provided by operating
activities of $2.9 million for the three months ended March 31, 1998. The
increase in cash used in operating activities is primarily attributed to the
increase in accounts receivable over the respective period. Net cash used in
investing activities totaled $10.2 million for the three months ended March 31,
1999, compared to net cash provided by investing activities of $2.9 million for
the three months ended March 31, 1998. The change resulted primarily from net
purchases of short-term investments during the three months ended March 31,
1999, compared to net sales and maturities of short-term investments during the
three months ended March 31, 1998. Net cash provided by financing activities
totaled $249,000 and $9,000 for the three months ended March 31, 1999 and 1998,
respectively, resulting from proceeds received from the exercise of stock
options by the Company's employees during the respective periods, in addition to
the decrease in notes receivable from officers during the three months ended
March 31, 1999.
The Company expects that its working capital requirements will continue to
increase to the extent the Company continues to grow. The Company believes that
its current cash and investment balances, cash provided by future operations, if
any, and available borrowings under the Company's line of credit are sufficient
to meet its working capital needs and anticipated capital expenditure
requirements through at least the next twelve months.
23
<PAGE> 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------ -------------
<S> <C>
10.42 Offer Letter between the Registrant and John Racioppi dated March
20, 1999
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
On April 21, 1999, the Company filed a report on Form 8-K containing the
Company's press release announcing that John Racioppi had been hired as
Senior Vice President, Worldwide Sales, and that Kai Krause, the Company's
Chief Design Officer, would be leaving the Company.
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
METACREATIONS CORPORATION
(Registrant)
Date: May 14, 1999 /s/ TERANCE A. KINNINGER
-------------------------
Terance A. Kinninger
Sr. Vice President and
Chief Financial Officer
25
<PAGE> 1
EXHIBIT 10.42
March 20, 1999
Mr. John Racioppi
536 Monterey Drive
Aptos, CA 95003
Via Federal Express
Dear John:
We are pleased to offer you the full time, regular position of Sr.
Vice-president of Worldwide Sales with MetaCreations Corporation (the Company)
commencing on or about April 5, 1999. Our team is excited that you will be
joining us. You will be located at our corporate headquarters in Santa Barbara,
and will report directly to me.
You will be an exempt, salaried employee and your starting base compensation
shall be $16,667 per month, earned semi-monthly and payable on the 15th and last
day of each month. This compensation will be reviewed annually. You will be
eligible for any benefit programs that are generally available to all employees.
You will also be eligible for $15,000 quarterly performance incentive, based on
achievement of established quarter-to-date sales objectives. These will be
determined and agreed upon at the time of your hire. The Company guarantees the
payment of this quarterly bonus for the first two (2) quarters of your
employment. Therefore, beginning in the fourth (4th) quarter, the payout
schedule of the $15,000 quarterly incentive will be as follows:
- - At 95% achievement of plan, you will receive $3,000.
- - At 96% achievement of plan, you will receive $4,000.
- - At 97% achievement of plan, you will receive $5,000.
- - At 98% achievement of plan, you will receive $6,000.
- - At 99% achievement of plan, you will receive $7,000.
- - At 100% achievement of plan, you will receive $ 15,000.
You will also receive an automobile allowance of $600.00 per month, a $50,000
annual Executive Bonus based on the performance of the company, and a $20,000
signing bonus payable within fifteen (15) days of the commencement of your
employment at MetaCreations.
26
<PAGE> 2
Additionally, MetaCreations will recommend to the Board of Directors that you be
granted a stock option entitling you to purchase 200,000 shares of the common
stock of the Company at the fair market value on the date of the grant. Options
granted will vest at 25% of the total grant one year from the date of any grant
and, thereafter, the balance shall vest at a rate of 1/36th of the balance per
month. Said options shall be subject to the Company's then operative Stock
Option Plans.
The Company will also provide you with relocation assistance in the form of
reimbursement for reasonable, documented physical relocation expenses incurred
in your move from the Santa Cruz area to the Santa Barbara area, and an interim
housing allowance for up to three (3) months while you are looking for a house.
MetaCreations will provide you with a secured loan of up to $250,000, within the
first year of your employment only, to assist you with the purchase of a home in
the Santa Barbara area. Although the precise terms of the loan and repayment
obligations will be presented to you in a future written document, the loan will
be due four (4) years from the date you commence employment at the Company. The
loan will be secured by a second mortgage on the house and the net, after-tax
proceeds from the exercise and sale of incentive stock options that you will
receive from the Company.
In the event you are involuntarily terminated for reasons other than cause
within the first 24 months of your employment, you shall receive base salary
continuation, including medical benefits, for six (6) months following your
termination, and relocation reimbursement for reasonable, documented physical
costs incurred with your move back to the Bay Area. If you are involuntarily
terminated as a result of a change of control of the Company and for reasons
other than cause, you will to receive base salary continuation, including
medical benefits, for six (6) months following your termination, and relocation
reimbursement for reasonable, documented physical costs incurred with your move
back to the Bay Area.
A change of control shall be defined as the acquisition by any person or entity
of the beneficial ownership, directly or indirectly, of securities of the
Company representing 50% or more of the total voting power represented by the
Company's then outstanding voting securities, the acquisition by any person or
entity of substantially all of the Company's assets, or a merger or
consolidation of the Company with any other corporation where the Company is not
the surviving corporation.
In the event of a change of control of the Company during the first year of your
employment that directly results in your employment being terminated for reasons
other than cause, 50% of your unvested options will vest. In the event of a
change of control of the Company during the second year of your employment that
directly results in your employment being terminated for reasons other than
cause, 100% of your unvested options will vest.
27
<PAGE> 3
Nothing in the grant of options or otherwise in this offer of employment should
be construed as a guarantee of continued employment for any set period of time.
As with all MetaCreations employees, either party may end the employment
relationship at any time, with or without cause. Employment at MetaCreations is
strictly at the will of each of the parties. This offer, and the Confidentiality
Agreement, represent the entire agreement between you and MetaCreations
regarding your employment with the Company, and supersede any previous oral or
written agreements. This offer is expressly contingent upon your supplying proof
of your ability to work in the United States in compliance with the Immigration
Reform and Control Act of 1986, within three days of your commencement date.
In acceptance of this position, please sign and return a copy of this letter,
together with a signed copy of MetaCreations' standard Employee Invention,
Copyright and Secrecy Agreement.
We are delighted that you will be joining MetaCreations Corporation. I know I
speak for the rest of the team in saying that we are looking forward to working
with you as you bring your unique and significant skills to the Company.
Sincerely, Accepted:
/s/Gary Lauer /s/John Racioppi
- ---------------------------------- ------------------------------------
Gary Lauer John Racioppi
Chief Executive Officer
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying unaudited consolidated financial statements and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,858
<SECURITIES> 39,925
<RECEIVABLES> 14,357
<ALLOWANCES> 0
<INVENTORY> 527
<CURRENT-ASSETS> 68,188
<PP&E> 12,355
<DEPRECIATION> 6,044
<TOTAL-ASSETS> 76,198
<CURRENT-LIABILITIES> 7,765
<BONDS> 0
0
0
<COMMON> 24
<OTHER-SE> 68,409
<TOTAL-LIABILITY-AND-EQUITY> 76,198
<SALES> 12,068
<TOTAL-REVENUES> 12,068
<CGS> 1,647
<TOTAL-COSTS> 1,647
<OTHER-EXPENSES> 12,070
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,092)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,092)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,092)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
